While the protests against the Vietnam War intensified in the first
years of the Nixon administration, the financial elite was fighting its
own war—over the future of banking and against Glass-Steagall
regulations. National City Bank chairman Walter Wriston was a steadfast
warrior in related battles, as he fought with Chase chairman David
Rockefeller for supremacy over the US banker community and for dominance
over global finance.

Rockefeller’s sights were set on a grander prize, one with worldwide
implications: ending the financial cold war. He made his mark in that
regard by opening the first US bank in Moscow since the 1920s, and the
first in Beijing since the 1949 revolution.

Augmenting their domestic and international expansion plans, both men
and their banks prospered from the emerging and extremely lucrative
business of recycling petrodollars from the Middle East into third world
countries. By acting as the middlemen—capturing oil revenues and
transforming them into high-interest-rate loans, to Latin America in
particular—bankers accentuated disparities in global wealth. They dumped
loans into developing countries and made huge amounts of money in the
process. By funneling profits into debts, they caused extreme pain in
the debtor nations, especially when the oil-producing nations began to
raise their prices. This raised the cost of energy and provoked a wave
of inflation that further oppressed these third world nations, the US
population, and other economies throughout the world.

Bank Holding Company Battles

When Eisenhower signed the 1956 Bank Holding Company Act banning
interstate banking, he left a large loophole as a conciliatory gambit: a
gray area as to what big banks could consider “financially-related
business,” which fell under their jurisdiction. In practice, that meant
that they could find ways to expand their breadth of services while they
figured out ways to grow their domestic grab for depositors. On May 26,
1970, the “Big Three” bankers— Wriston and Rockefeller, along with
Alden “Tom” Clausen, chairman of Bank America Corporation—appeared
before the Senate Banking and Currency Committee to press their case for
widening the loophole.
During the proceedings, Wriston led the charge on behalf of his
brethren in the crusade. Tall, slim, elegantly dressed, and the most
articulate of the three, he dramatically called on Congress to “throw
off some of the shackles on banking which inhibit competition in the
financial markets.”

The global financial landscape was evolving. Ever since World War II,
US bankers hadn’t worried too much about their supremacy being
challenged by other international banks, which were still playing
catch-up in terms of deposits, loans, and global customers. But by now
the international banks had moved beyond postwar reconstructive pain and
gained significant ground by trading with Cold War enemies of the
United States. They were, in short, cutting into the global market that
the US bankers had dominated by extending themselves into areas in which
the US bankers were absent for US policy reasons. There was no such
thing as “enough” of a market share in this game. As a result, US
bankers had to take a longer, harder look at the “shackles” hampering
their growth. To remain globally competitive, among other things,
bankers sought to shatter post-Depression legislative barriers like
Glass-Steagall.

They wielded fear coated in shades of nationalism as a weapon: if US
bankers became less competitive, then by extension the United States
would become less powerful. The competition argument would remain
dominant on Wall Street and in Washington for nearly three decades,
until the separation of speculative and commercial banking that had been
invoked by the Glass-Steagall Act would be no more.

Wriston deftly equated the expansion of US banking with general US
global progress and power. It wasn’t so much that this connection hadn’t
occurred to presidents or bankers since World War II; indeed, that was
how the political-financial alliances had been operating.

But from that
point on, the notion was formally and publicly verbalized, and placed on
the congressional record. The idea that commercial banks served the
country and perpetuated its global identity and strength, rather than
the other way around, became a key argument for domestic
deregulation—even if, in practice, it was the country that would serve
the banks.

The Penn Central Debacle

There was, however, a fly in the ointment. To increase their size,
bankers wanted to be able to accumulate more services or branches
beneath the holding company umbrella. But a crisis in another industry
would give some legislators pause. The Penn Central meltdown, the first
financial crisis of Nixon’s presidency, temporarily dampened the ardency
of deregulation enthusiasts. The collapse of the largest, most diverse
railroad holding company in America was blamed on overzealous bank
lending to a plethora of non-railroad-oriented entities under one
holding company umbrella. The debacle renewed debate about a stricter
bank holding company bill.
Under Wriston’s guidance, National City had spearheaded a
fifty-three-bank syndicate to lend $500 million in revolving credit to
Penn Central, even when it showed obvious signs of imminent implosion.

Penn Central had been one of the leading US corporations in the
1960s. President Johnson had supported the merger that spawned the
conglomerate on behalf of a friend, railroad merger specialist Stuart
Saunders, who became chairman. He had done this over the warnings of the
Justice Department and despite allegations of antitrust violations
called by its competitors. With nary a regulator paying attention, Penn
Central had morphed into more than a railroad holding company,
encompassing real estate, hotels, pipelines, and theme parks. Meanwhile,
highways, cars, and commercial airlines had chipped away at Penn
Central’s dominant market position. To try to compensate, Penn
Central had delved into a host of speculative expansions and deals. That
strategy was failing fast. By May 1970, Penn Central was feverishly
drawing on its credit lines just to scrounge up enough cash to keep
going.

The conglomerate demonstrated that holding companies could be mere
shell constructions under which other unrelated businesses could exist,
much as the 1920s holding companies housed reckless financial ventures
under utility firm banners.

Allegations circulated that Rockefeller had launched a five-day
selling strategy of Penn Central stock, culminating with the dumping of
134,400 shares on the fifth day, based on insider information he
received as one of the firm’s key lenders. He denied the charges.

In a joint effort with the bankers to hide the Penn Central debacle
behind a shield of federal bailout loans, the Pentagon stepped in,
claiming that assisting Penn Central was a matter of national defense.5
Under the auspices of national security, Washington utilized the Defense
Production Act of 1950, a convenient bill passed at the start of the
Korean War that enabled the president to force businesses to prioritize
national security–related endeavors.

On June 21, 1970, Penn Central filed for bankruptcy, becoming the
first major US corporation to go bust since the Depression. Its failure
was not an isolated incident by any means. Instead, it was one of a
number of major defaults that shook the commercial paper market to its
core. (“Commercial paper” is a term for the short-term promissory notes
sold by large corporations to raise quick money, backed only by their
promise to pay the amount of the note at the end of its term, not by any
collateral.) But the agile bankers knew how to capitalize on that
turmoil. When companies stopped borrowing in the flailing commercial
paper market, they had to turn to major banks like Chase for loans
instead. As a result, the worldwide loans of Chase, First National City
Bank, and Bank of America surged to $27.7 billion by the end of 1971,
more than double the 1969 total of $13 billion.

A year later, the largest US defense company, Lockheed, was facing
bankruptcy, as well. Again bankers found a way to come out ahead on the
people’s dime. Lockheed’s bankers at Bank of America and Bankers Trust
led a syndicate that petitioned the Defense Department for a bailout on
similar national security grounds. The CEO, Daniel Haughton, even agreed
to step down if an appropriate government loan was provided.

In response, the Nixon administration offered $250 million in
emergency loans to Lockheed—in effect, bailing out the banks and the
corporation. To explain the bailout at a time when the general economy
was struggling, Nixon introduced the Lockheed Emergency Loan Act by
stating, “It will have a major impact on the economy of California, and
will contribute greatly to the economic strength of the country as a
whole.” After the bill was passed, not a single Lockheed executive
stepped down.

It would take several years of political-financial debate and more
bailouts to sustain Penn Central. One 1975 article labeled the entire
episode “The Penn-C Fairy Tale” and condemned the subsequent federal
bailout: “While the country is in the worst recession since the
depression and unemployment lines grow longer every day, Congress is
dumping another third of a billion dollars of your tax payer dollars
down the railroad rat hole.” (The incident was prologue: Congress would
lavish hundreds of billions of dollars to sustain the biggest banks
after the 2008 financial crisis, topped up by trillions of dollars from
the Fed and the Treasury Department in the form of loans, bond
purchases, and other subsidies.)

More Bank Holding Company Politics

Despite the Penn Central crisis, the revised Bank Holding Company Act
decisively passed the Senate on September 16, 1970, by a bipartisan
vote of seventy-seven to one. The final version was far more lenient
than the one that Texas Democrat John William Wright Patman, chair of
the House Committee on Banking and Currency, or even the Nixon
administration had originally envisioned. The revised act allowed big
banks to retain nonbank units acquired before June 1968. It also gave
the Fed greater regulatory authority over bank holding companies,
including the power to determine what constituted one. Language was
added to enable banks to be considered one-bank holding companies if
they, or any of their subsidiaries, held any deposits or extended any
commercial loans, thus broadening their scope.

President Nixon signed the bill into law without fanfare on New
Year’s Eve 1970. In fact, his inner circle decided against making a
splash about it. They didn’t think the public would understand or care.
Plus, they realized that there was a prevailing attitude that the Nixon
administration had favored the big banks, and though it had, this was
not something they wanted to draw attention to.

The End of the Gold Standard

The top six banks controlled 20 percent of the nation’s deposits
through one-bank holding companies, but second place in that group
wasn’t good enough for Wriston, who noted to the Nixon administration
that his bank was really the “caretaker of the aspirations of millions
of people” whose money it held. Wriston flooded the New York Fed with
proposals for expansion. His applications “were said to represent as
many as half of the total of all of the banks.” The Fed was so
overwhelmed, it had to enlist First National City Bank to interpret the
new law on its behalf.

By mid-1971, the Fed had approved thirteen and rejected seven of
Wriston’s applications. His biggest disappointment was the insurance
underwriting rejection. The possibility of converting depositors for
insurance business had been tantalizing. It would continue to be a
hard-fought, ultimately successful battle.

Around the same time, New York governor Nelson Rockefeller (David
Rockefeller’s brother) approved legislation permitting banks to set up
subsidiaries in each of the state’s nine banking districts. This was a
gift for Wriston and David Rockefeller, because it meant their banks
could expand within the state. Each subsidiary could open branches
through June 1976, when the districts would be eliminated and banks
could merge and branch freely.

Several months later, First National City Bank was paying generous
prices to purchase the tiniest upstate banks, from which it began
extending loans to the riskiest companies and getting hosed in the
process; a minor David vs. Goliath revenge of local banks against Wall
Street muscle.

By that time, the stock market had turned bearish, and foreign
countries were increasingly demanding their paper dollars be converted
into gold as they shifted funds out of dollar reserves. Bankers,
meanwhile, postured for a dollar devaluation, which would make their
cost of funds cheaper and enable them to expand their lending
businesses.

They knew that the fastest way to further devalue the dollar was to
sever it from gold, and they made their opinions clear to Nixon, taking
care to blame the devaluation on external foreign speculation, not their
own movement of capital and lending abroad.

The strategy worked. On August 15, 1971, Nixon bashed the
“international money speculators” in a televised speech, stating,
“Because they thrive on crises they help to create them.”16 He noted
that “in recent weeks the speculators have been waging an all-out war on
the American dollar.” His words were true in essence, yet they were
chosen to exclude the actions of the major US banks, which were also
selling the dollar. Foreign central banks had access to US gold through
the Bretton Woods rules, and they exercised this access. Exchanging
dollars for gold had the effect of decreasing the value of the US dollar
relative to that gold. Between January and August 1971, European banks
(aided by US banks with European branches) catalyzed a $20 billion gold
outflow.

As John Butler wrote in The Golden Revolution, “By July 1971, the US
gold reserves had fallen sharply, to under $10 billion, and at the rate
things were going, would be exhausted in weeks. [Treasury Secretary
John] Connally was tasked with organizing an emergency weekend meeting
of Nixon’s various economic and domestic policy advisers. At 2:30 p.m.
on August 13, they gathered, in secret, at Camp David to decide how to
respond to the incipient run on the dollar.”

Nixon’s solution, pressed by the banking community, was to abandon
the gold standard. In his speech the president informed Americans that
he had directed Connally to “suspend temporarily the convertibility of
the dollar into gold or other reserve assets.” He promised this would
“defend the dollar against the speculators.” Because Bretton Woods
didn’t allow for dollar devaluation, Nixon effectively ended the accord
that had set international currency parameters since World War II,
signaling the beginning of the end of the gold standard.

Once the dollar was no longer backed by gold, questions surfaced as
to what truly backed it (besides the US military). According to Butler,
“The Bretton Woods regime was doomed to fail as it was not compatible
with domestic US economic policy objectives which, from the mid-1960s
onwards, were increasingly inflationary.”

It wasn’t simply policy that was inflationary. The expansion of debt
via the joint efforts of the Treasury Department and the Federal Reserve
was greatly augmented by the bankers’ drive to loan more funds against
their capital base. That established a debt inflation policy, which took
off after the dissolution of Bretton Woods. Without the constraint of
keeping gold in reserve to back the dollar, bankers could increase their
leverage and speculate more freely, while getting money more easily
from the Federal Reserve’s discount window. Abandoning the gold standard
and “floating” the dollar was like navigating the waters of global
finance without an anchor to slow down the dispersion of money and
loans. For the bankers, this made expansion much easier.

Indeed, on September 24, 1971, Chase board director and former
Treasury Secretary C. Douglas Dillon (chairman of the Brookings
Institution and, from 1972 to 1975, the Rockefeller Foundation) told
Connally that “under no circumstances should we ever go back to assuming
limited convertibility into gold.” Chase Board chairman David
Rockefeller wrote National Security Adviser (and later Secretary of
State) Henry Kissinger to recommend “a reevaluation of foreign
currencies, a devaluation of the dollar, removal of the U.S. import
surcharge and ‘buy America’ credits, and a new international monetary
system with greater flexibility . . . and less reliance on gold.”

With the dollar devalued, investors poured money into stocks, fueling
a rally from November 1971 led by the “Nifty Fifty,” a group of
“respectable” big-cap growth stocks. These were being bought “like
greyhounds chasing a mechanical rabbit” by pension funds, insurance
companies, and trust funds. The Chicago Board of Trade began trading
options on individual stocks in 1973 to increase the avenues for
betting; speculators could soon thereafter trade futures on currencies
and bonds.

The National Association of Securities Dealers rendered all this
trading easier on February 8, 1971, when it launched the NASDAQ. The
first computerized quote system enabled market makers to post and
transact over-the-counter prices quickly. With the stock market booming
again, NASDAQ became a more convenient avenue for Wall Street firms to
raise money. Many abandoned their former partnership models whereby the
firm’s partners risked their own capital for the firm, in favor of
raising capital by selling the public shares. That way, the upside—and
the growing risk—would also be diffused and transferred to shareholders.
Merrill Lynch was one of the first major investment bank partnerships
to go “public” in 1971. Other classic industry leaders quickly followed
suit.

Meanwhile, corporations were finding prevailing lower interest rates
more attractive. Instead of getting loans from banks, they could fund
themselves more cheaply by issuing bonds in the capital markets. This
took business away from commercial banks, which were restricted by
domestic regulation from acting as issuing agents. But bankers had
positioned themselves on both sides of the Atlantic to get around this
problem, so they were covered by the shift in their major customers’
financing preferences. While their ability to service corporate demand
was dampened at home, overseas it roared. Currency market turmoil also
led many countries to the Eurodollar market for credit, where US banks
were waiting. Thus, the credit extended through international branches
of major US banks tripled to $4.5 billion from 1969 to 1972.

The market rally, cheered on by the media, was enough to bolster
Nixon’s fortunes. In the fall of 1972, Nixon was reelected in a
landslide on promises to end the Vietnam War with “peace and honor.”
Wall Street reaped the benefits of a bull market, and more citizens and
companies were sucked into new debt products. The Dow hit a 1970s peak
of 1,052 points in January 1973, as Nixon began his second term.

2 comments:

ESQUIRE "ESQ" the system to BIGOT: LAW. Dress up in robes, wield gavels as though colonial tyrants and the beat just went on and on and on, into knowing nothing about money sovereignty as THE LAW, and so hypocrisy knows no boundaries in the collapse of bigotry, the big one?